[PFS Bancorp Logo]
PFS BANCORP, INC.
2004 ANNUAL REPORT
TO SHAREHOLDERS
TABLE OF CONTENTS
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Page
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President's Letter to Shareholders..............................................................................1
Business of PFS Bancorp, Inc....................................................................................2
Market Price of PFS Bancorp Common Shares and Related Shareholder Matters.......................................2
Selected Consolidated Financial and Other Data..................................................................3
Management's Discussion and Analysis of Financial Condition and Results of Operations...........................5
Report of Independent Registered Public Accounting Firm........................................................14
Consolidated Statements of Financial Condition.................................................................15
Consolidated Statements of Earnings............................................................................16
Consolidated Statements of Comprehensive Income................................................................17
Consolidated Statements of Shareholders' Equity................................................................18
Consolidated Statements of Cash Flows..........................................................................19
Notes to Consolidated Financial Statements.....................................................................21
Directors and Executive Officers...............................................................................43
Banking Locations and Shareholder Information..................................................................44
President's Letter
Dear Shareholders, Customers, and Employees:
As we look back on 2004 and PFS Bancorp's performance, we are sure it will be
viewed as a time of challenge and growth. The challenge came in the form of
historically low interest rates on loans and continued pressure on our interest
rate spread. Our deposits are made up of numerous products with different
durations which are used primarily to fund our loan portfolio of largely
adjustable rate loan products. Historically, this mix has worked well for PFS ,
however, with respect to 2004, we focused on loan growth to drive our increase
in net interest income. This growth came primarily in both the commercial and
residential mortgage areas and is reflected in the results of this report.
We were pleased to reward our shareholders for their faith in PFS Bancorp with
not only regular dividends of 7.5 cents per share for the first three quarters
of 2004 but a special dividend of $5.00 per share for the fourth quarter of
2004. Shareholders' equity at December 31, 2004 remained a solid $20.5 million
or 15.8% of total assets, a decrease of $6.4 million or 23.7% from the December
31, 2003 level. Apparently, the investment community appreciates our efforts to
date. At December 31, 2004, our share price was $17.67, representing a net gain
of 15.4% from the December 31, 2003 closing price, adjusted for the $5.00 per
share special dividend.
Our assets at December 31, 2004 totaled $129.8 million representing an increase
of $11.5 million, or 9.7% compared to the December 31, 2003 level. The loan
portfolio experienced total growth of $14.4 million or 14.3% to a record high of
$114.7 million. We are further encouraged by the composition of our loan
portfolio as $99.9 million, or 84.4% of the portfolio, consists of
adjustable-rate loans. We are looking forward to continuing this trend in 2005.
Net earnings for the year ended December 31, 2004 totaled $897,000, an increase
of $70,000, or 8.5%, compared to the $827,000 for the year ended December 31,
2003. In 2004, diluted earnings per share amounted to $.64, compared to $.60 in
2003. The slight increase in net earnings can be attributed to the increases in
net interest income and other income.
As we continue to grow, we pledge to do our best to maintain your trust. This
pledge has been carried forward since the establishment of Peoples Federal
Savings Bank in 1887. We have a long and proud legacy to live up to. Our goal
has always been to maintain a stable and secure financial institution that
provides quality service to our customers while offering competitive rates on
our loans and deposits. The key to meeting that goal is, as it always has been,
our employees, who have over 400 years of combined banking experience. We are
encouraged by our progress to date and look forward to building on our
successes.
I wish to thank our directors, officers and employees for their support and
their continued service and dedication to PFS Bancorp and the Bank. We have made
many changes in the past four years and I feel we have just begun to see the
potential of PFS. I would also like to thank you as investors for your
overwhelming support and confidence in our stock.
Sincerely,
/s/ Mel E. Green
Mel E. Green
President and Chief Executive Officer
1
PFS Bancorp, Inc.
BUSINESS OF PFS BANCORP, INC.
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PFS Bancorp, Inc., an Indiana corporation ("PFS Bancorp" or the
"Corporation"), is a unitary savings and loan holding company which owns all of
the outstanding common shares of Peoples Federal Savings Bank ("Peoples" or the
"Bank"), a federally chartered savings bank.
Founded in 1887, Peoples is a community and customer oriented stock
savings bank organized under the laws of the United States. Peoples conducts
business out of its main office located in Aurora, Indiana and two branch
offices in Rising Sun and Vevay, Indiana. Peoples' business consists principally
of attracting deposits from the general public and using those funds to
originate loans secured by one-to-four-family residential real estate,
multi-family real estate and non-residential real estate, as well as consumer
loans. Peoples' profitability depends primarily on its net interest income,
which is the difference between the income it receives on loans and other assets
and its cost of funds, which consists of the interest paid on deposits and
borrowings. At December 31, 2004, PFS Bancorp had total assets of $129.8
million, deposits of $86.9 million and total shareholders' equity of $20.5
million.
PFS Bancorp is subject to regulation, supervision and examination by the
Office of Thrift Supervision of the U.S. Department of Treasury (the "OTS"), as
its primary federal regulator, and the Federal Deposit Insurance Corporation
(the "FDIC"), which administers the Savings Association Insurance Fund. The FDIC
insures deposits in Peoples up to applicable limits.
MARKET PRICE OF PFS BANCORP
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
================================================================================
PFS Bancorp's common shares have been listed on the Nasdaq National Market
("Nasdaq") since October 2001, under the symbol "PBNC." Presented below are the
high and low trading prices for PFS Bancorp's common shares as well as related
dividends for the two year period from January 1, 2003 to December 31, 2004.
Such prices do not include retail financial markups, markdowns or commissions.
Information relating to prices has been obtained from Nasdaq.
Quarter ended: High Low Dividends
2004
December 31, 2004............... $24.26 $15.07 $ 5.000
September 30, 2004.............. 22.80 20.50 .075
June 30, 2004................... 20.50 19.06 .075
March 31, 2004.................. 20.79 19.50 .075
2003
December 31, 2003............... $20.50 $17.75 $ .075
September 30, 2003.............. 18.00 16.88 .075
June 30, 2003................... 17.80 15.88 .075
March 31, 2003.................. 16.46 15.18 .075
As of March 24, 2005, PFS Bancorp had 1,473,728 common shares outstanding
held of record by approximately 321 shareholders. The number of shareholders
does not reflect the number of persons or entities who may hold stock in nominee
or "street" name through brokerage firms or others.
2
PFS Bancorp, Inc.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
================================================================================
The following selected consolidated financial and other data does not
purport to be complete and is qualified in its entirety by reference to the more
detailed financial information, including the audited Consolidated Financial
Statements and related notes, appearing elsewhere herein.
At December 31,
2004 2003
(Dollars In Thousands)
Selected Balance Sheet Data:
Total assets ................................ $129,754 $118,273
Cash and cash equivalents(1) ................ 7,484 5,187
Investment securities available for sale .... 5,014 10,016
Investment securities held to maturity ...... 143 152
Loans receivable-net ........................ 114,673 100,293
Deposits .................................... 86,939 88,328
FHLB advances and other borrowings .......... 21,000 2,000
Shareholders' equity ........................ 20,529 26,922
Full service offices ........................ 3 3
Year ended
December 31,
2004 2003
(In thousands, except per share data)
Selected Operating Data:
Total interest income ....................... $ 5,677 $ 5,747
Total interest expense ...................... 1,704 1,922
-------- --------
Net interest income ......................... 3,973 3,825
Provision for losses on loans ............... 96 52
-------- --------
Net interest income after provision
for losses on loans ....................... 3,877 3,773
Total other income .......................... 503 398
Total general, administrative and other
expense ................................... 2,882 2,780
-------- --------
Earnings before income taxes ................ 1,498 1,391
Income taxes ................................ 601 564
-------- --------
Net earnings ................................ $ 897 $ 827
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Earnings per share
Basic ..................................... $ .65 $ .60
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Diluted ................................... $ .64 $ .60
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Footnotes on following page.
3
PFS Bancorp, Inc.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
================================================================================
At or for the year ended
December 31,
Selected Operating Ratios(2): 2004 2003
Performance Ratios:
Return on average assets ............................ .72% .70%
Return on average equity ............................ 3.60 3.09
Equity to assets at end of period ................... 15.82 22.76
Interest rate spread(3) ............................. 2.78 2.67
Net interest margin(3) .............................. 3.24 3.28
Average interest-earning assets to average
interest-bearing liabilities ...................... 132.88 136.92
Net interest income after provision for
losses on loans to total general,
administrative and other expense .................. 134.52 135.72
Total general, administrative and other
expense to average total assets ................... 2.31 2.34
Dividend payout ratio(4) ............................ 803.85 50.00
Asset Quality Ratios:
Non-performing and impaired loans to total loans
at end of period(5) ............................... .71% 1.48%
Non-performing and impaired assets to total assets
at end of period(5) ............................... .63 1.40
Allowance for loan losses to total loans
at end of period .................................. .73 .77
Allowance for loan losses to total
non-performing and impaired loans
at end of period(5) ............................... 102.08 51.96
Capital Ratios(6):
Tangible capital ratio .............................. 16.9% 18.2%
Core capital ratio .................................. 16.9 18.2
Risk-based capital ratio ............................ 28.7 31.2
----------
(1) Consists of cash and short-term interest-bearing deposits in other
financial institutions.
(2) With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods.
(3) Interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
rate on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) The Corporation paid a $5.00 per share special dividend in 2004.
(5) Non-performing loans consist of non-accrual loans and non-performing
assets consist of non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof.
(6) Consists of regulatory ratios for Peoples Federal Savings Bank
4
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
General
PFS Bancorp's profitability depends primarily on its net interest income,
which is the difference between interest and dividend income on interest-earning
assets, principally loans, investment securities and interest-earning deposits
in other financial institutions, and interest expense on interest-bearing
deposits and borrowings, primarily from the Federal Home Loan Bank of
Indianapolis. Net interest income is dependent upon the level of interest rates
and the extent to which such rates are changing. PFS Bancorp's profitability
also depends, to a lesser extent, on the level of other income, the provision
for losses on loans, general, administrative and other expenses and federal
income taxes.
Historically, Peoples' business has consisted primarily of originating
single-family real estate loans secured by property in its market area and
funded by deposits. Typically, single-family loans involve a lower degree of
risk and carry a lower yield than commercial, nonresidential real estate,
construction and consumer loans. In recent years, Peoples has increased its
investment in commercial and nonresidential real estate loans, as well as
utilizing Federal Home Loan Bank advances as a funding source for new loans.
PFS Bancorp's operations and profitability are subject to changes in
interest rates, applicable statutes and regulations and general economic
conditions, as well as other factors beyond management's control.
Forward-Looking Statements Are Subject to Change
Certain statements are made in this document as to what management expects
may happen in the future. These statements usually contain the words "believe,"
"estimate," "project," "expect," "anticipate," "intend" or similar expressions.
Because these statements look to the future, they are based on management's
current expectations and beliefs. Actual results or events may differ materially
from those reflected in the forward-looking statements. Management's current
expectations and beliefs as to future events are subject to change at any time,
and no assurances can be provided that the future events will actually occur.
Critical Accounting Policies
Certain of the Corporation's accounting policies are important to the
portrayal of the Corporation's financial condition, since they require
management to make difficult, complex or subjective judgments, some of which may
relate to matters that are inherently uncertain. Estimates associated with these
policies are susceptible to material changes as a result of changes in facts and
circumstances. Facts and circumstances that could affect these judgments
include, but without limitation, changes in interest rates, changes in the
performance of the economy or changes in the financial condition of borrowers.
Management believes that its critical accounting policies include determining
the allowance for loan losses. If management were to underestimate the allowance
for loan losses, earnings could be reduced in the future as a result of greater
than expected net loan losses. Overestimations of the required allowance could
result in future increases in income, as loan loss recoveries increase or
provisions for losses on loans decrease.
5
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
The following tables present for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. All average
balances are based on daily balances for 2004 and monthly balances for 2003.
Management does not believe that the monthly averages differ significantly from
the daily average balances.
Year ended December 31,
2004 2003
At December 31, 2004 Average Average
Yield/ Average Yield/ Average Yield/
Balance Rate Balance Interest Rate Balance Interest Rate
(Dollars In thousands)
Interest-earning assets:
Loans receivable, net(1) .................. $114,673 5.00% $108,861 $5,325 4.89% $ 97,021 $5,269 5.43%
Investment securities (2) ................. 6,132 3.43 9,494 293 3.09 13,166 402 3.05
Deposits in other financial institutions(3) 6,489 2.05 4,398 59 1.34 6,365 76 1.19
-------- ----- -------- ------ ------ -------- ------ -------
Total interest-earning assets .......... 127,294 4.77 122,753 5,677 4.62 116,552 5,747 4.93
Non-interest-earning assets ............... 2,460 1,774 2,143
-------- -------- --------
Total assets ........................... $129,754 $124,527 $118,695
======== ======== ========
Interest-bearing liabilities:
Deposits .................................. $ 82,881 1.95 $ 80,830 1,422 1.76% $ 84,950 $1,919 2.26%
FHLB advances ............................. 17,500 2.89 10,899 249 2.28 175 3 1.71
Note payable .............................. 3,500 5.28 650 33 5.08 -- -- --
-------- ----- -------- ------ ------ -------- ------ -------
Total interest-bearing liabilities ..... 103,881 2.22 92,379 1,704 1.84 85,125 1,922 2.26
----- ------ ------ ------ -------
Non-interest-bearing liabilities .......... 5,344 7,264 6,790
-------- -------- --------
Total liabilities ...................... 109,225 99,643 91,915
Total equity(4) ........................... 20,529 24,884 26,780
-------- -------- --------
Total liabilities and equity ........... $129,754 $124,527 $118,695
======== ======== ========
Net interest-earning assets ............... $ 23,413 $ 30,374 $ 31,427
======== ======== ========
Net interest income ....................... $3,973 $3,825
====== ======
Interest rate spread ...................... 2.55% 2.78% 2.67%
===== ====== ======
Net interest margin ....................... 3.24% 3.28%
====== ======
Average interest-earning assets to average
interest bearing liabilities ............ 132.88% 136.92%
====== ======
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(1) Includes nonaccruing loans. Interest income on loans receivable includes
amortized loan fees.
(2) Includes Federal Home Loan Bank stock.
(3) Includes interest-bearing demand deposits and other interest-bearing
deposits.
(4) Includes accumulated other comprehensive income.
6
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Rate/Volume Analysis
The following table shows the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities affected PFS
Bancorp's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), and (ii) changes in rate (change in
rate multiplied by prior year volume). The combined effect of changes in both
rate and volume has been allocated proportionately to the change due to rate and
the change due to volume.
Year ended December 31, 2004
vs December 31, 2003
Increase (Decrease) Due to Total Increase
Yield/Rate Volume (Decrease)
(In Thousands)
Interest-earning assets:
Loans receivable, net ............................ $(552) $ 608 $ 56
Investment securities ............................ 5 (114) (109)
Deposits in other financial institutions ......... 9 (26) (17)
----- ----- -----
Total ..................................... (538) 468 (70)
Interest-bearing liabilities:
Deposits ......................................... (408) (89) (497)
Borrowings ....................................... 1 278 279
----- ----- -----
Total ..................................... (407) 189 (218)
----- ----- -----
Increase (decrease) in net interest income ....... $(131) $ 279 $ 148
===== ===== =====
7
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Changes in Financial Condition From December 31, 2004 to December 31, 2003
Total assets amounted to $129.8 million at December 31, 2004, an increase
of $11.5 million, or 9.7%, compared to December 31, 2003. The increase in assets
consisted primarily of a $14.4 million, or 14.3%, increase in loans receivable,
which was principally funded by additional advances from the Federal Home Loan
Bank, which increased by $15.5 million. A special dividend of $5.00 per share or
$7.4 million was paid to shareholders of record at the close of business on
October 18, 2004. The Corporation borrowed $3.5 million to finance the dividend
payment.
Investment securities totaled $5.2 million at December 31, 2004, a
decrease of $5.0 million, or 49.3%, from December 31, 2003 levels. The decrease
resulted primarily from maturities and sales of $23.1 million and $713,000,
respectively, which were partially offset by purchases totaling $18.7 million
during the year. The average yield on investment securities was 3.09% for 2004.
Loans receivable increased by $14.4 million, or 14.3%, during the year
ended December 31, 2004, to a total of $114.7 million. Loan disbursements
amounted to $46.3 million and were partially offset by principal payments of
$31.8 million. During the year ended December 31, 2004, loan originations were
comprised of $26.2 million in loans secured by one- to four-family residential
real estate, $1.1 million in loans secured by multifamily residential real
estate, $11.6 million in loans secured by commercial and nonresidential real
estate and $7.4 million in consumer and other loans.
The allowance for loan losses totaled $833,000 and $771,000 at December
31, 2004 and 2003, respectively. Nonperforming and impaired loans totaled
$816,000 and $1.5 million at December 31, 2004 and 2003, respectively. The
allowance for loan losses represented 102.1% and 52.0% of nonperforming and
impaired loans as of December 31, 2004 and 2003, respectively. The allowance
represented approximately .73% and .77% of the total loan portfolio at December
31, 2004 and 2003, respectively. At December 31, 2004, nonperforming and
impaired loans were comprised of $280,000 in loans secured by one- to
four-family residential real estate, $514,000 in loans secured by nonresidential
real estate and $22,000 in commercial, consumer and other loans. Although
management believes that its allowance for loan losses at December 31, 2004, was
sufficient to cover known and inherent losses in the portfolio based upon the
available facts and circumstances, there can be no assurance that additions to
such allowance will not be necessary in future periods, which could adversely
affect the Corporation's results of operations.
Deposits totaled $86.9 million at December 31, 2004, a decrease of $1.4
million, or 1.6% from December 31, 2003 levels. The decline was due primarily to
planned withdrawals from one municipality's savings account. Excluding this one
account, deposits would have increased $4.0 million, or 4.6%. While management
generally strives to maintain a moderate level of growth in deposits through
marketing and pricing strategies, the current low interest rate environment
presented an impediment to increasing deposits as depositors sought
higher-yielding alternative investments.
Shareholders' equity amounted to $20.5 million at December 31, 2004, a
decrease of $6.4 million, or 23.7%, from December 31, 2003 levels. The decrease
resulted primarily from the payment of dividends of $7.7 million which included
a special dividend of $5.00 per share, or $7.4 million, in October 2004. The
decrease was partially offset by net earnings of $897,000, a $140,000 increase
in unrealized gains on securities designated as available for sale, and an
increase of $270,000 attributable to the amortization effects of a distribution
of shares in connection with the Company's Recognition and Retention Plan and
the Employee Stock Ownership Plan.
8
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Comparison of Operating Results for the Years Ended December 31, 2004 and 2003
General. Net earnings amounted to $897,000 for the year ended December 31,
2004, compared to $827,000 for the year ended December 31, 2003. The increase in
earnings of $70,000, or 8.5%, was due primarily to a $148,000, or 3.9%, increase
in net interest income and a $105,000, or 26.4%, increase in other income, which
were partially offset by a $44,000, or 84.6%, increase in the provision for
losses on loans, a $102,000, or 3.7%, increase in general, administrative and
other expense, and a $37,000, or 6.6%, increase in income taxes.
Net Interest Income. Total interest income amounted to $5.7 million for
the year ended December 31, 2004, a decrease of $70,000, or 1.2%, for the year
ended December 31, 2003. Interest income on loans totaled $5.3 million during
the 2004 period, an increase of $56,000, or 1.1%, from the 2003 period. The
increase was primarily due to a $11.8 million, or 12.2%, increase in the average
balance of loans outstanding year to year, which was partially offset by a 54
basis point decrease in the weighted-average yield year to year, to 4.89% for
the year ended December 31, 2004. The decrease in the average yield was due to
the downward repricing of our adjustable rate mortgage loans. The increase in
the average balance was due primarily to increased origination activity.
Interest income on investment securities decreased by $109,000, or 27.1%,
for the year ended December 31, 2004, compared to the year ended December 31,
2003. This decline was due primarily to a $3.7 million, or 27.9%, decrease in
the average balance outstanding, which was partially offset by a 4 basis point
increase in the weighted-average yield to 3.09% for the year ended December 31,
2004. Interest income on other interest-bearing deposits decreased by $17,000,
or 22.4%, during the year ended December 31, 2004, compared to 2003, due
primarily to a $2.0 million, or 30.9%, decrease in the average balance
outstanding for the year. The decline in the average balance of investment
securities and interest-bearing deposits was primarily due to the use of such
funds to fund loan growth.
Interest expense decreased by $218,000, or 11.3%, to $1.7 million for the
year ended December 31, 2004, compared to $1.9 million for the year ended
December 31, 2003. Interest expense on deposits decreased by $497,000, or 25.9%,
due primarily to a decrease in the average rate paid from 2.26% for the year
ended December 31, 2003 to 1.76% for the year ended December 31, 2004, coupled
with a $4.1 million, or 4.8%, decrease in the average balance of
interest-bearing deposits outstanding year to year. The decrease in the rate
paid generally reflects a decline in market rates in the overall economy.
Interest expense on borrowings increased by $279,000 to $282,000 for the year
ended December 31, 2004 compared to the $3,000 borrowing cost recorded in 2003.
This increase in interest expense on borrowings was due to an increase in the
average balance of borrowings during 2004, which, as stated previously, was
utilized to fund loan growth.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $148,000, or 3.9%, to $4.0 million for
the year ended December 31, 2004, compared to $3.8 million for the year ended
December 31, 2003. The interest rate spread increased from 2.67% for the year
ended December 31, 2003 to 2.78% for the year ended December 31, 2004, while the
net interest margin decreased from 3.28% in 2003 to 3.24% in 2004. The ratio of
average interest-earning assets to average interest-bearing liabilities
decreased from 136.92% to 132.88% year to year.
9
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Comparison of Operating Results for the Years Ended December 31, 2004 and 2003
(continued)
Provision for Losses on Loans. As a result of an analysis of historical
experience, the volume and type of lending conducted by the Bank, the status of
past due principal and interest payments, general market conditions,
particularly as such conditions relate to the Bank's market area, and other
factors related to the collectibility of the Bank's loan portfolio, management
elected to record a provision for losses on loans totaling $96,000 for the year
ended December 31, 2004 compared to the $52,000 provision for the year ended
December 31, 2003. The current year provision was predicated primarily upon the
growth in the loan portfolio, including an increase in loans secured by both
residential and nonresidential real estate correlated to the level of loan
charge-offs during 2004. There can be no assurance that the loan loss allowance
will be sufficient to cover losses on nonperforming assets in the future.
Other Income. Other income amounted to $503,000 for the year ended
December 31, 2004, an increase of $105,000, or 26.4%, compared to $398,000 for
the year ended December 31, 2003. The increase was primarily due to a $66,000,
or 24.6%, increase in service charge fees which includes returned check fees and
ATM fees. In addition, there was a $28,000 loss resulting from the sale of
investment securities in 2003, as compared to a $6,000 gain in 2004.
General, Administrative and Other Expense. General, administrative and
other expense increased by $102,000, or 3.7%, to $2.9 million for the year ended
December 31, 2004. Employee compensation and benefits increased by $157,000, or
10.1%, due primarily to normal merit increases coupled with an increase in
benefit expenses. The increase in benefit costs was due to the increased market
value of the Corporation's common stock, coupled with increased costs related to
the defined benefit retirement plan. Data processing expense increased by
$16,000, or 7.0%, and other operating expense increased by $44,000, or 8.8%, due
primarily to check processing costs related to Check 21 and loan processing
expenses, which were partially offset by a $55,000, or 14.5%, decrease in
occupancy and equipment expense and a $59,000 decrease in the provision for
losses on real estate acquired through foreclosure. The decline in occupancy and
equipment expense reflects a reduction in real estate taxes and a decrease in
depreciation expense.
Income Tax. The provision for income taxes totaled $601,000 for the year
ended December 31, 2004, an increase of $37,000, or 6.6%, from the $564,000
recorded for the year ended December 31, 2003. The increase in income taxes was
due primarily to an $107,000, or 7.7%, increase in pre-tax earnings. The
Company's effective tax rates were 40.1% and 40.5% for the years ended December
31, 2004 and 2003, respectively.
10
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Exposure to Changes in Interest Rates
Our ability to maintain net interest income depends upon our ability to
earn a higher yield on assets than the rates we pay on our deposits and
borrowings. Our interest-earning assets consist primarily of long-term
residential mortgage loans which have adjustable rates of interest. Our ability
to maintain a positive spread between the interest earned on assets and the
interest paid on deposits and borrowings can be adversely affected when market
rates of interest rise since our adjustable-rate loans typically do not adjust
as rapidly as our liabilities.
Quantitative Analysis. The OTS provides a quarterly report on the
potential impact of interest rate changes upon the market value of portfolio
equity. Management reviews the quarterly reports from the OTS which show the
impact of changing interest rates on net portfolio value. The report is based on
financial data provided by management of Peoples. Net portfolio value is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts.
Qualitative Analysis. Our ability to maintain a positive "spread" between
the interest earned on assets and the interest paid on deposits and borrowings
is affected by changes in interest rates. Our fixed-rate loans help our
profitability if interest rates are stable or declining since these loans have
yields that exceed the cost of funds. At December 31, 2004, $18.4 million, or
16.6%, of the total loan portfolio consisted of fixed-rate loans. If interest
rates increase, however, we would have to pay more on our deposits and new
borrowings, which would adversely affect our interest rate spread. In order to
counter the potential effects of dramatic increases in market rates of interest,
we have focused primarily on marketing adjustable-rate mortgage loans as well as
shorter term commercial real estate and consumer loans. At December 31, 2004,
$96.3 million, or 84.0% of the total loan portfolio, consisted of
adjustable-rate loans.
Although the interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, management also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and net
portfolio value, which is defined as the net present value of a savings
institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and net portfolio value.
11
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
The following tables present Peoples' net portfolio value as of December
31, 2004 and 2003.
December 31, 2004
Net Portfolio Value
Estimated
Change in NPV as a Change as a
interest rates Estimated percentage Amount percentage
(basis points) NPV of assets of change of assets
(Dollars in thousands)
+300 $21,729 17.14% $(4,661) (262)bp
+200 23,748 18.34 (2,642) (142)bp
+100 25,440 19.30 (950) (47)bp
0 26,390 19.77 -- --
-100 26,357 19.63 (33) (13)bp
December 31, 2003
Net Portfolio Value
Estimated
Change in NPV as a Change as a
interest rates Estimated percentage Amount percentage
(basis points) NPV of assets of change of assets
(Dollars in thousands)
+300 $21,223 18.69% $(3,196) (203)bp
+200 22,864 19.79 (1,555) (93)bp
+100 24,006 20.51 (413) (21)bp
0 24,419 20.72 -- --
-100 24,407 20.63 (12) (9)bp
Net portfolio values are not provided for a decline of 200 or 300 basis
points as the cost of funds would approximate zero at those levels.
12
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Liquidity and Capital Resources
Peoples maintains cash and liquid investments in corporate debt
securities, municipal obligations and other securities to meet loan commitments
and other funding needs.
The following table sets forth information regarding Peoples' obligations
and commitments to make future payments under contract as of December 31, 2004.
Payments due by period
Less More
than 1-3 3-5 than
1 year years years 5 years Total
(In thousands)
Contractual obligations:
Advances from the Federal Home Loan Bank $ 8,000 $ 6,500 $ 3,000 $ -- $17,500
Note payable -- 3,500 -- -- 3,500
Certificates of deposit 41,349 12,622 1,183 177 55,331
Amount of commitments expiration per period
Commitments to originate loans:
One- to four-family residential loans 1,219 -- -- -- 1,219
Nonresidential real estate loans 36 -- -- -- 36
Undisbursed loans in process 2,746 -- -- -- 2,746
Commercial lines of credit 4,543 -- -- -- 4,543
Home equity 2,122 -- -- -- 2,122
Letters of credit 45 252 -- -- 297
------- ------- ------- ------- -------
Total contractual obligations $60,060 $22,874 $ 4,183 $ 177 $87,294
======= ======= ======= ======= =======
Peoples anticipates that it will have sufficient funds available to meet
its current loan commitments. Based upon historical deposit flow data, Peoples'
competitive pricing in its market and management's experience, management
believes that a significant portion of maturing certificates of deposit will
remain with Peoples.
Liquidity management is both a daily and long-term function of Peoples'
management strategy. In the event that Peoples should require funds beyond its
ability to generate them internally, additional funds are available through the
use of FHLB advances, and also may be available through sales of securities,
although no sales of securities are planned.
Peoples is required to maintain regulatory capital sufficient to meet
tangible, core and risk-based capital ratios of at least 1.5%, 4.0% and 8.0%,
respectively. At December 31, 2004, Peoples more than exceeded each of its
capital requirements, with tangible, core and risk-based capital ratios of
16.9%, 16.9% and 28.7%, respectively.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein regarding PFS Bancorp have been prepared in accordance with accounting
principles generally accepted in the United States of America, which generally
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation. Unlike most industrial companies, virtually all of
PFS Bancorp's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on PFS Bancorp's
performance than does the effect of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services, since such prices are affected by inflation to a larger extent than
interest rates.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
PFS Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of PFS Bancorp, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for each of the years ended December 31, 2004 and 2003. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Corporation is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PFS Bancorp, Inc.
as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 11, 2005
14
17
PFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2004 and 2003
(In thousands, except share data)
ASSETS 2004 2003
Cash and due from banks $ 995 $ 855
Interest-bearing deposits in other financial institutions 6,489 4,332
--------- ---------
Cash and cash equivalents 7,484 5,187
Investment securities designated as available for sale -
at market 5,014 10,016
Investment securities held to maturity - at amortized cost, which
approximates market 143 152
Loans receivable - net 114,673 100,293
Office premises and equipment - at depreciated cost 940 1,065
Real estate acquired through foreclosure -- 169
Federal Home Loan Bank stock - at cost 975 758
Accrued interest receivable 441 395
Prepaid expenses and other assets 64 126
Prepaid income taxes 20 20
Deferred income taxes -- 92
--------- ---------
Total assets $ 129,754 $ 118,273
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 86,939 $ 88,328
Advances from the Federal Home Loan Bank 17,500 2,000
Note payable 3,500 --
Advances by borrowers for taxes and insurance 201 63
Accrued interest payable 11 12
Other liabilities 1,061 948
Deferred income taxes 13 --
--------- ---------
Total liabilities 109,225 91,351
Commitments -- --
Shareholders' equity
Preferred stock, 5,000,000 shares authorized, $.01 par value;
no shares issued -- --
Common stock - 10,000,000 shares authorized, $.01 par value;
1,551,293 shares issued 16 16
Additional paid-in capital 15,106 15,029
Retained earnings - restricted 7,298 14,101
Less 77,565 shares of treasury stock - at cost (1,282) (1,282)
Shares acquired by stock benefit plans (1,608) (1,801)
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects 999 859
--------- ---------
Total shareholders' equity 20,529 26,922
--------- ---------
Total liabilities and shareholders' equity $ 129,754 $ 118,273
========= =========
The accompanying notes are an integral part of these statements.
15
PFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31, 2004 and 2003
(In thousands, except share data)
2004 2003
Interest income
Loans $ 5,325 $ 5,269
Investment securities 293 402
Interest-bearing deposits and other 59 76
------- -------
Total interest income 5,677 5,747
Interest expense
Deposits 1,422 1,919
Borrowings 282 3
------- -------
Total interest expense 1,704 1,922
------- -------
Net interest income 3,973 3,825
Provision for losses on loans 96 52
------- -------
Net interest income after provision for
losses on loans 3,877 3,773
Other income (loss)
Gain (loss) on sale of real estate acquired through foreclosure (1) 10
Gain (loss) on sale of investment securities 6 (28)
Service charges 334 268
Other operating 164 148
------- -------
Total other income 503 398
General, administrative and other expense
Employee compensation and benefits 1,716 1,559
Occupancy and equipment 325 380
Data processing 245 229
Federal deposit insurance premiums 50 51
Provision for losses on real estate acquired through foreclosure -- 59
Other operating 546 502
------- -------
Total general, administrative and other expense 2,882 2,780
------- -------
Earnings before income taxes 1,498 1,391
Income taxes
Current 568 528
Deferred 33 36
------- -------
Total income taxes 601 564
------- -------
NET EARNINGS $ 897 $ 827
======= =======
EARNINGS PER SHARE
Basic $ .65 $ .60
======= =======
Diluted $ .64 $ .60
======= =======
The accompanying notes are an integral part of these statements.
16
PFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2004 and 2003
(In thousands)
2004 2003
Net earnings $ 897 $ 827
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the year,
net of taxes (benefits) of $72 and ($21) for the years ended
December 31, 2004 and 2003, respectively 144 (40)
Reclassification adjustment for realized (gains) losses included
in earnings, net of taxes (benefits) of $2 and $(10) for the years
ended December 31, 2004 and 2003, respectively (4) 18
------- -------
Comprehensive income $ 1,037 $ 805
======= =======
Accumulated comprehensive income $ 999 $ 859
======= =======
The accompanying notes are an integral part of these statements.
17
PFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2004 and 2003
(In thousands, except share data)
Additional
Common paid-in Retained Treasury
stock capital earnings shares
Balance at January 1, 2003 $ 16 $ 14,971 $ 13,723 $ --
Amortization of expense related to stock benefit plan -- 58 -- --
Purchase of treasury shares -- -- -- (1,282)
Net earnings for the year ended December 31, 2003 -- -- 827 --
Cash dividends of $.30 per share -- -- (449) --
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- -- --
-------- -------- -------- --------
Balance at December 31, 2003 16 15,029 14,101 (1,282)
Amortization of expense related to stock benefit plan -- 77 -- --
Net earnings for the year ended December 31, 2004 -- -- 897 --
Cash dividends of $5.225 per share -- -- (7,700) --
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- -- --
-------- -------- -------- --------
Balance at December 31, 2004 $ 16 $ 15,106 $ 7,298 $ (1,282)
======== ======== ======== ========
Unrealized gains
Shares (losses) on
acquired securities
by stock designated as
benefit plans available for sale Total
Balance at January 1, 2003 $ (1,994) $ 881 $ 27,597
Amortization of expense related to stock benefit plan 193 -- 251
Purchase of treasury shares -- -- (1,282)
Net earnings for the year ended December 31, 2003 -- -- 827
Cash dividends of $.30 per share -- -- (449)
Unrealized losses on securities designated as available
for sale, net of related tax effects -- (22) (22)
-------- -------- --------
Balance at December 31, 2003 (1,801) 859 26,922
Amortization of expense related to stock benefit plan 193 -- 270
Net earnings for the year ended December 31, 2004 -- -- 897
Cash dividends of $5.225 per share -- -- (7,700)
Unrealized gains on securities designated as available
for sale, net of related tax effects -- 140 140
-------- -------- --------
Balance at December 31, 2004 $ (1,608) $ 999 $ 20,529
======== ======== ========
18
PFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004 and 2003
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the year $ 897 $ 827
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premium on investment securities 54 80
Amortization of deferred loan origination fees (42) (61)
Amortization expense of stock benefit plans 270 251
(Gain) loss on sale of real estate acquired through foreclosure 1 (10)
Dividends on Federal Home Loan Bank stock (35) (28)
(Gain) loss on sale of investment securities (6) 28
Depreciation 160 189
Provision for losses on loans 96 52
Provision for losses on real estate acquired through foreclosure -- 59
Deferred compensation liability 42 52
Increase (decrease) in cash due to changes in:
Accrued interest receivable (46) 51
Prepaid expenses and other assets 62 50
Other liabilities 136 13
Accrued interest payable (1) (14)
Income taxes
Current (65) (50)
Deferred 33 (25)
-------- --------
Net cash provided by operating activities 1,556 1,464
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 23,103 31,937
Proceeds from sale of investment securities 713 3,001
Principal repayments on investment securities 9 9
Purchase of investment securities designated as available for sale (18,650) (29,953)
Loan principal repayments 31,779 35,516
Loan disbursements (46,263) (40,145)
Purchase of office premises and equipment (35) (84)
Proceeds from sale of real estate acquired through foreclosure 218 57
Purchase of Federal Home Loan Bank stock (182) --
-------- --------
Net cash provided by (used in) investing activities (9,308) 338
Cash flows provided by (used in) financing activities:
Net decrease in deposits (1,389) (1,092)
Proceeds from note payable 3,500 --
Proceeds from Federal Home Loan Bank advances 23,500 4,500
Repayment of Federal Home Loan Bank advances (8,000) (3,500)
Advances by borrowers for taxes and insurance 138 (17)
Dividends paid on common stock (7,700) (449)
Purchase of treasury shares -- (1,282)
-------- --------
Net cash provided by (used in) financing activities 10,049 (1,840)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,297 (38)
Cash and cash equivalents at beginning of year 5,187 5,225
-------- --------
Cash and cash equivalents at end of year $ 7,484 $ 5,187
======== ========
19
PFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended December 31, 2004 and 2003
(In thousands)
2004 2003
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 633 $ 697
======= =======
Interest on deposits and borrowings $ 1,705 $ 1,936
======= =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 140 $ (22)
======= =======
Transfers from loans to real estate acquired through
foreclosure $ 50 $ 47
======= =======
The accompanying notes are an integral part of these statements.
20
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES
In 2001, the Board of Directors of Peoples Federal Savings Bank ("Peoples"
or the "Savings Bank") adopted an overall plan of conversion and
reorganization (the "Plan") whereby the Savings Bank would convert to the
stock form of ownership, followed by the issuance of all the Savings
Bank's outstanding stock to a newly formed holding company, PFS Bancorp,
Inc. (the "Corporation"). The conversion to the stock form of ownership
was completed in October 2001, culminating in the Corporation's issuance
of 1,551,293 common shares.
The Savings Bank conducts a general banking business in southeastern
Indiana which primarily consists of attracting deposits from the general
public and applying those funds to the origination of loans for
residential, consumer, and nonresidential purposes. Peoples' profitability
is significantly dependent on its net interest income, which is the
difference between interest income generated from interest-earning assets
(i.e. loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e. deposits and borrowed funds). Net
interest income is affected by the relative amount of interest-earning
assets and interest-bearing liabilities and the interest received or paid
on these balances. The level of interest rates paid or received by Peoples
can be significantly influenced by a number of environmental factors, such
as governmental monetary policy, that are outside of management's control.
The financial information presented herein has been prepared in accordance
with accounting principles generally accepted in the United States of
America ("U.S. GAAP") and general accounting practices within the
financial services industry. In preparing financial statements in
accordance with U.S. GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Corporation and its subsidiary, Peoples. All significant intercompany
balances and transactions have been eliminated.
2. Investment Securities
---------------------
The Corporation accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investments in debt and equity securities be categorized as
held-to-maturity, trading, or available for sale. Securities classified as
held-to-maturity are to be carried at cost only if the Corporation has the
positive intent and ability to hold these securities to maturity.
Securities designated as available for sale are carried at fair value with
resulting unrealized gains or losses recorded to shareholders' equity.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
21
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable
----------------
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation.
The allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and principal
payments has returned to normal, in which case the loan is returned to
accrual status. If the ultimate collectibility of the loan is in doubt, in
whole or in part, all payments received on nonaccrual loans are applied to
reduce principal until such doubt is eliminated.
4. Loan Origination Fees
---------------------
The Savings Bank accounts for loan origination fees in accordance with
SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases."
Pursuant to the provisions of SFAS No. 91, origination fees received from
loans, net of direct origination costs, are deferred and amortized to
interest income using the level-yield method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a
loan, i.e., principally actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Savings
Bank's experience with similar commitments, are deferred and amortized
over the life of the related loan using the interest method.
5. Allowance for Loan Losses
-------------------------
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the
level of delinquent and problem loans, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Savings Bank records a charge-off equal to the difference
between the fair value of the property securing the loan and the loan's
carrying value. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. The
allowance for loan losses is increased by charges to earnings and
decreased by charge-offs (net of recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which requires
that impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or, as
an alternative, at the loan's observable market price or fair value of the
collateral. The Savings Bank's current procedures for evaluating impaired
loans result in carrying such loans at the lower of cost or fair value.
22
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
-------------------------
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in multi-family and nonresidential loans, and
its evaluation of impairment thereof, such loans are collateral dependent,
and as a result, are carried as a practical expedient at the lower of cost
or fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
The Savings Bank's impaired loan information was as follows at December
31:
2004 2003
(In thousands)
Impaired loans with related allowance $ -- $ --
Impaired loans with no related allowance 514 514
---- ----
Total impaired loans $514 $514
==== ====
Average balance of impaired loans $514 $517
Interest income recognized on impaired loans $ 19 $ 25
6. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided primarily using the
straight-line and declining balance methods over the useful lives of the
assets, generally estimated to be thirty years for the building and
building improvements and five to seven years for furniture and equipment.
An accelerated depreciation method is used for tax reporting purposes.
7. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated
selling expenses at the date of acquisition. Real estate loss provisions
are recorded if the properties' fair value subsequently declines below the
value determined at the recording date. In determining the lower of cost
or fair value at acquisition, costs relating to development and
improvement of property are capitalized. Costs relating to holding real
estate acquired through foreclosure, net of rental income, are charged
against earnings as incurred.
23
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
8. Income Taxes
------------
The Corporation accounts for income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and
its reported amount in the financial statements that will result in
taxable or deductible amounts in future periods. Deferred tax assets are
recorded only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current
period earnings, carried back against prior years' earnings, offset
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income.
A valuation allowance is provided for deferred tax assets to the extent
that the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future
taxable income. Deferred tax liabilities are provided on the total amount
of net temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees and costs, deferred
compensation, charitable contributions carryforwards and the general loan
loss allowance. Additionally, a temporary difference is recognized for
depreciation utilizing accelerated methods for federal income tax
purposes.
9. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-average
common shares outstanding during the period, less shares in the ESOP that
are unallocated and not committed to be released. Weighted-average common
shares deemed outstanding gives effect to 75,597 and 86,632 unallocated
ESOP shares as of December 31, 2004 and 2003, respectively.
Diluted earnings per share is computed by taking into consideration common
shares outstanding and the dilutive effect of additional potential common
shares issuable under the Company's stock option plan. The computations
are as follows:
For the year ended
December 31,
2004 2003
Weighted-average common shares
outstanding (basic) 1,387,129 1,390,238
Dilutive effect of assumed exercise
of stock options 12,401 37
--------- ---------
Weighted-average common shares
outstanding (diluted) 1,399,530 1,390,275
========= =========
24
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Benefit Plans
-------------
The Corporation has an Employee Stock Ownership Plan ("ESOP") that
provides retirement benefits for substantially all employees who have
completed one year of service and have attained the age of 21. The
Corporation accounts for the ESOP in accordance with Statement of Position
("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
SOP 93-6 requires that compensation expense recorded by employers equal
the fair value of ESOP shares allocated to participants during a given
year. Expense related to the ESOP totaled approximately $239,000 and
$210,000 for the years ended December 31, 2004 and 2003, respectively.
The Corporation also has a Recognition and Retention Plan ("RRP").
Subsequent to the offering of common shares by the Corporation, the RRP
purchased 60,835 shares of the Corporation's common stock in the open
market. During 2002, 21,294 shares were awarded to members of the Board of
Directors and certain members of management. Common stock awarded under
the RRP vests ratably over a five year period, commencing with the date of
the award. A provision of $71,000 related to the RRP was charged to
operations for each of the years ended December 31, 2004 and 2003.
The Savings Bank funds its defined benefit pension plan through
participation in the Pentegra Defined Benefit Plan (the "Plan"). The
Savings Bank is required to fund pension costs accrued. The Savings Bank
made a $47,000 and $6,000 contribution in 2004 and 2003, respectively, due
to the Plan's funding requirements. The provision for pension expense is
computed by the Plan's actuaries utilizing the projected unit credit cost
method and assuming a 8.25% return on Plan assets. The Savings Bank is not
required to disclose separate actuarial information due to the Plan's
classification as a multi-employer pension plan.
The Savings Bank has a 401(k) savings plan for its employees. All
employees are eligible and receive matching contributions from the Savings
Bank at a predetermined rate. Expense recognized in connection with the
401(k) savings plan totaled approximately $11,000 for each of the years
ended December 31, 2004 and 2003.
The Savings Bank has a nonqualified Executive Officers and Directors
Deferred Compensation Plan (the "Compensation Plan"), which provides for
the payment of benefits to its directors and certain officers upon
termination of service with the Savings Bank, with full vesting in the
Compensation Plan after ten years of service. The deferred compensation
unfunded liability reflects the current value of the plan obligation based
on a present value of providing a sum certain of $17,800 per year to each
participant for ten years after retirement. The present value was
determined using an interest rate of 7.5% and considering the time to
retirement for each participant. The Savings Bank recorded expense
totaling $42,000 and $52,000 for the Compensation Plan during the years
ended December 31, 2004 and 2003, respectively.
25
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Stock Option Plan
-----------------
In 2002, the Board of Directors adopted the PFS Bancorp, Inc. 2002 Stock
Option Plan (the "Plan") that provides for the issuance of 152,088 shares
of authorized, but unissued shares of common stock at fair value at the
date of grant. Stock options were granted in June 2003 for 79,316
(adjusted) shares at an exercise price equal to fair value of $13.22
(adjusted for the $5.00 special dividend in 2004). The Plan provides that
one-fifth of the options granted become exercisable on each of the first
five anniversaries of the date of grant and each option has an exercise
period of ten years from the grant date.
The Corporation accounts for the Plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue to account for stock options and similar
equity instruments under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make
pro forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been
applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for the Plan. Accordingly, no compensation cost had been
recognized for the Plan. Had compensation cost for the Plan been
determined based on the fair value at the grant date for awards under the
Plan consistent with the accounting method utilized in SFAS No. 123, the
Corporation's net earnings and earnings per share would have been reported
as the pro forma amounts indicated below:
Year ended
December 31,
2004 2003
Net earnings (In thousands) As reported $ 897 $ 827
Stock-based compensation, net of tax (36) (14)
----- -----
Pro-forma $ 861 $ 813
===== =====
Earnings per share
Basic As reported $ .65 $ .60
Stock-based compensation, net of tax (.03) (.02)
----- -----
Pro-forma $ .62 $ .58
===== =====
Diluted As reported $ .64 $ .60
Stock-based compensation, net of tax (.03) (.02)
----- -----
Pro-forma $ .61 $ .58
===== =====
26
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Stock Option Plan (continued)
-----------------
The fair value of each option grant is estimated on the date of grant
using the modified Black-Scholes options-pricing model with the following
assumptions used for grants during 2003: dividend yield of 1.7%; expected
volatility of 15.8%; a risk-free interest rate of 3.4%; and an expected
life of ten years for all grants.
A summary of the status of the Plan as of and for the year ended December
31 is presented below:
2004 2003
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of year 79,316 $13.22 -- $ --
Granted -- -- 79,316 13.22
Exercised -- -- -- --
Forfeited -- -- -- --
------ ------ ------ ------
Outstanding at end of year 79,316 $13.22 79,316 $13.22
====== ====== ====== ======
Options exercisable at year-end 15,863 $13.22 -- $ --
====== ====== ====== ======
Weighted-average fair value of options granted N/A $ 3.82
during the year ====== ======
The following information applies to options outstanding at December 31,
2004:
Number outstanding 79,316
Range of exercise prices $13.22
Weighted-average exercise price $13.22
Weighted-average remaining contractual life 8.50 years
12. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and interest-bearing deposits in other financial
institutions with original terms to maturity of less than ninety days.
27
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both
assets and liabilities, whether or not recognized in the statements of
financial condition, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all non-financial instruments from the
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Investment securities: Fair values for investment securities
are based on quoted market prices and dealer quotes.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential and
nonresidential real estate. These categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts, and consumer
and other loans, fair values were deemed to equal the historic
carrying values.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair values of deposits with no stated maturity,
such as NOW accounts, passbook accounts and money market
passbook accounts are deemed to approximate the amount payable
on demand as of December 31, 2004 and 2003. The fair values
for fixed-rate certificates of deposit are based on the
discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of
similar remaining maturities.
Advances from the Federal Home Loan Bank and Note Payable: The
fair value of these borrowings is estimated using the rates
currently offered for similar borrowings of similar remaining
maturities or, when available, quoted market prices.
28
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
-----------------------------------
Advances by borrowers for taxes and insurance: The carrying
amount of advances by borrowers for taxes and insurance is
deemed to approximate fair value.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The fair value of outstanding loan
commitments at December 31, 2004 and 2003, was not material.
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Corporation's financial instruments are as follows at
December 31:
2004 2003
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 7,484 $ 7,484 $ 5,187 $ 5,187
Investment securities designated as available for sale 5,014 5,014 10,016 10,016
Investment securities held to maturity 143 143 152 152
Loans receivable - net 114,673 113,531 100,293 101,441
Federal Home Loan Bank stock 975 975 758 758
-------- -------- -------- --------
$128,289 $127,147 $116,406 $117,554
======== ======== ======== ========
Financial liabilities
Deposits $ 86,939 $ 86,945 $ 88,328 $ 88,876
Advances from the Federal Home Loan Bank 17,500 17,479 2,000 2,000
Note payable 3,500 3,500 -- --
Advances by borrowers for taxes and insurance 201 201 63 63
-------- -------- -------- --------
$108,140 $108,125 $ 90,391 $ 90,939
======== ======== ======== ========
14. Advertising
-----------
Advertising costs are expensed when incurred. The Corporation's
advertising expense totaled $36,000 and $31,000 for the years ended
December 31, 2004 and 2003, respectively.
15. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 2004
consolidated financial statement presentation.
29
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
16. Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
a revision to SFAS No. 123 which establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for
goods or services, primarily on accounting for transactions in which an
entity obtains employee services in share-based transactions. This
Statement, SFAS No. 123 (R) "Share Based Payment", requires a public
entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the
award, with limited exceptions. That cost will be recognized over the
period during which an employee is required to provide services in
exchange for the award - the requisite service period. No compensation
cost is recognized for equity instruments for which employees do not
render the requisite service. Employee share purchase plans will not
result in recognition of compensation cost if certain conditions are met.
Initially, the cost of employee services received in exchange for an award
of liability instruments will be measured based on current fair value; the
fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that
period. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will
be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately
before the modification.
Excess tax benefits, as defined by SFAS No. 123(R) will be recognized as
an addition to additional paid-in capital. Cash retained as a result of
those excess tax benefits will be presented in the consolidated statement
of cash flows as financing cash inflows. The write-off of deferred tax
assets relating to unrealized tax benefits associated with recognized
compensation cost will be recognized as income tax expense unless there
are excess tax benefits from previous awards remaining in additional paid
in capital to which it can be offset.
Compensation cost is required to be recognized in the beginning of the
first interim or annual period that begins after December 15, 2005, or
January 1, 2006 as to the Corporation. The Corporation anticipates the
annual compensation expense under SFAS No. 123 will approximate the amount
disclosed in Note A-11 above.
30
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investment securities at December 31, 2004 and
2003, are as follows:
2004
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Municipal obligations $ 143 $ -- $ -- $ 143
======= ======= ======= =======
Available for sale:
Corporate debt securities $ 2,980 $ 27 $ 8 $ 2,999
U. S. Government agency securities 500 -- 12 488
FHLMC stock 20 1,507 -- 1,527
------- ------- ------- -------
Total investment securities available for sale $ 3,500 $ 1,534 $ 20 $ 5,014
======= ======= ======= =======
2003
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Municipal obligations $ 152 $ -- $ -- $ 152
======= ======= ======= =======
Available for sale:
Corporate debt securities $ 8,194 $ 135 $ 4 $ 8,325
U. S. Government agency securities 500 -- 17 483
FHLMC stock 20 1,188 -- 1,208
------- ------- ------- -------
Total investment securities available for sale $ 8,714 $ 1,323 $ 21 $10,016
======= ======= ======= =======
31
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE B - INVESTMENT SECURITIES (continued)
The amortized cost and estimated fair value of corporate debt and U. S.
Government agency securities, by contractual terms to maturity, are shown
below at December 31, 2004 and 2003.
2004 2003
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
Due within one year $1,971 $1,981 $5,188 $5,219
Due after one through three years 509 524 2,506 2,609
Due after three through five years 500 494 500 497
Due after five through ten years 250 245 250 240
Due after ten through fifteen years 250 243 250 243
------ ------ ------ ------
$3,480 $3,487 $8,694 $8,808
====== ====== ====== ======
Municipal obligations are scheduled to mature ratably over the next 11
years.
Proceeds from sales of investment securities totaled $713,000 during the
year ended December 31, 2004, resulting in gross realized gains of $6,000.
Proceeds from sales of investment securities totaled $3.0 million during
the year ended December 31, 2003, resulting in gross realized losses of
$28,000.
The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2004:
Less than 12 months 12 months or longer Total
Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
securities investments value losses investments value losses investments value losses
(Dollars in thousands)
Corporate debt and
agency securities 3 $ 705 $ 5 3 $ 736 $ 15 6 $1,441 $ 20
====== ====== ====== ====== ====== ====== ====== ====== ======
Management has the intent and ability to hold these securities for the
foreseeable future. The decline in the fair value is primarily due to an
increase in market interest rates. The fair values are expected to recover
as securities approach maturity dates.
32
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at December 31 was as follows:
2004 2003
(In thousands)
One- to four-family residential real estate $ 84,432 $ 76,330
Multi-family residential real estate 2,158 2,168
Construction 7,709 3,908
Nonresidential real estate and land 16,659 14,142
Commercial 4,590 3,282
Consumer and other loans 2,802 2,676
-------- --------
118,350 102,506
Less:
Undisbursed loans in process 2,746 1,361
Deferred loan origination fees 98 81
Allowance for loan losses 833 771
-------- --------
$114,673 $100,293
======== ========
As depicted above, the Savings Bank's lending efforts have historically
focused on one- to four-family and multi-family residential real estate
loans, which comprise approximately $86.6 million, or 76%, of the total
loan portfolio at December 31, 2004, and $78.5 million, or 78%, of the
total loan portfolio at December 31, 2003. Customarily, such loans have
been underwritten on the basis of no more than an 80% loan-to-value ratio,
which has historically provided the Savings Bank with adequate collateral
coverage in the event of default. Nevertheless, the Savings Bank, as with
any lending institution, is subject to the risk that residential real
estate values could deteriorate in its primary lending area of
southeastern Indiana, thereby impairing collateral values. However,
management is of the belief that real estate values in the Savings Bank's
primary lending area are presently stable.
In the ordinary course of business, the Savings Bank has granted loans to
some of its executive officers, directors, and their related interests. In
the opinion of management, such loans are within applicable regulatory
lending limitations and do not involve more than the normal risk of
collectibility. The aggregate dollar amount of these loans was
approximately $102,000 and $146,000 at December 31, 2004 and 2003,
respectively.
33
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the years ended December
31 is summarized as follows:
2004 2003
(In thousands)
Beginning balance $771 $764
Provision for losses on loans 96 52
Charge-off of loans (39) (47)
Recoveries 5 2
---- ----
Ending balance $833 $771
==== ====
As of December 31, 2004, the Savings Bank's allowance for loan losses was
solely general in nature, and is includible as a component of regulatory
risk-based capital.
At December 31, 2004 and 2003, the Savings Bank's nonperforming and
impaired loans totaled approximately $816,000 and $1.5 million,
respectively. Interest income which would have been recognized if such
loans had performed pursuant to contractual terms totaled approximately
$21,000 and $30,000 for the years ended December 31, 2004 and 2003,
respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are comprised of the following at December
31:
2004 2003
(In thousands)
Land and improvements $ 107 $ 107
Buildings and improvements 1,303 1,299
Furniture and equipment 953 974
Automobiles 19 19
------ ------
2,382 2,399
Less accumulated depreciation and amortization 1,442 1,334
------ ------
$ 940 $1,065
====== ======
34
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
Deposit type and weighted-
average interest rate 2004 2003
(In thousands)
Non-interest bearing accounts $ 4,058 $ 5,178
NOW accounts
2004 - 0.77% 7,993
2003 - 0.46% 7,525
Savings accounts
2004 - 0.50% 9,616
2003 - 0.50% 9,604
Super Savers
2004 - 0.75% 9,941
2003 - 0.75% 13,888
------- -------
Total demand, transaction and
passbook deposits 31,608 36,195
Certificates of deposit
Original maturities of:
Less than 12 months
2004 - 1.54% 2,914
2003 - 1.28% 3,616
12 months to 24 months
2004 - 2.35% 27,628
2003 - 2.15% 23,653
24 months to 36 months
2004 - 3.24% 9,624
2003 - 3.55% 9,540
More than 36 months
2004 - 4.09% 2,565
2003 - 4.16% 1,716
Individual retirement
2004 - 2.62% 8,385
2003 - 3.21% 8,384
Jumbo
2004 - 2.38% 4,215
2003 - 2.31% 5,224
------- -------
Total certificates of deposit 55,331 52,133
------- -------
Total deposits $86,939 $88,328
======= =======
At December 31, 2004 and 2003, the Savings Bank had certificate of deposit
accounts with balances in excess of $100,000 totaling approximately $17.2
million and $13.8 million, respectively.
35
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is summarized
as follows:
2004 2003
(In thousands)
Savings, NOW and super savers $ 180 $ 271
Certificates of deposit 1,242 1,648
------- -------
$ 1,422 $ 1,919
======= =======
Maturities of outstanding certificates of deposit at December 31 are
summarized as follows:
2004 2003
(In thousands)
Less than six months $18,215 $20,942
Six months to one year 23,134 16,764
One year to three years 12,622 13,414
Three years or more 1,360 1,013
------- -------
$55,331 $52,133
======= =======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
2004 by pledges of certain residential mortgage loans totaling $25.4
million and the Savings Bank's investment in Federal Home Loan Bank stock,
are summarized as follows:
Maturing
year ending
Interest rate December 31, 2004 2003
(In thousands)
1.75% 2004 $ -- $ 2,000
1.57% 2005 2,000 --
2.51% 2005 2,000 --
2.40% 2005 2,000 --
2.66% 2005 2,000 --
2.69% 2007 2,000 --
3.34% 2007 2,000 --
3.71% 2007 2,500 --
3.73% 2009 3,000 --
------- -------
$17,500 $ 2,000
======= =======
Weighted-average interest rate 2.89% 1.75%
======= =======
36
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE H - NOTES PAYABLE
The Corporation has a revolving line of credit with another financial
institution which allows the Corporation to borrow up to $3.5 million at
prime rate maturing in November 2006. At December 31, 2004, the
Corporation had $3.5 million outstanding under the line, which was paid in
full in January 2005.
NOTE I - INCOME TAXES
The provision for income taxes differs from that computed at the statutory
corporate tax rate at December 31 as follows:
2004 2003
(In thousands)
Federal income taxes computed at 34% statutory rate $ 509 $ 473
Increase (decrease) in taxes resulting from:
Dividends received deduction (6) (5)
Tax exempt interest (3) (3)
State income taxes - net of federal tax benefits 90 90
Other 11 9
----- -----
Income tax provision per financial statements $ 601 $ 564
===== =====
Effective income tax rate 40.1% 40.5%
===== =====
The composition of the Corporation's net deferred tax asset (liability) at
December 31 is as follows:
Taxes (payable) refundable on temporary 2004 2003
differences at statutory rate: (In thousands)
Deferred tax assets:
Stock benefit plans $ 10 $ 10
Deferred compensation 268 254
General loan loss allowance 283 289
Deferred loan origination fees -- 19
Charitable contribution carryforward 98 98
----- -----
Total deferred tax assets 659 670
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (21) (10)
Difference between book and tax depreciation (71) (85)
Deferred loan origination costs (27) --
Unrealized gains on securities available for sale (515) (443)
State income taxes (38) (40)
----- -----
Total deferred tax liabilities (672) (578)
----- -----
Net deferred tax asset (liability) $ (13) $ 92
===== =====
37
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE I - INCOME TAXES (continued)
Prior to 1997, the Savings Bank was allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income and subject to certain
limitations based on aggregate loans and deposit account balances at the
end of the year. If the amounts that qualified as deductions for federal
income tax purposes are later used for purposes other than for bad debt
losses, including distributions in liquidation, such distributions will be
subject to federal income taxes at the then current corporate income tax
rate. Retained earnings at December 31, 2004, includes approximately $1.2
million for which federal income taxes have not been provided. The amount
of the unrecognized deferred tax liability relating to the cumulative bad
debt deduction is approximately $400,000.
NOTE J - LOAN COMMITMENTS
The Savings Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers, including commitments to extend credit.
Such commitments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of the commitments
reflect the extent of the Savings Bank's involvement in such financial
instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Savings Bank uses the same credit policies in making
commitments and conditional obligations as those utilized for
on-balance-sheet instruments.
At December 31, 2004 and 2003, the Savings Bank had outstanding
commitments of approximately $1.3 million and $3.2 million, respectively,
to originate loans. The Savings Bank was obligated under unused lines of
credit for home equity loans in the amount of $2.1 million and $1.6
million at December 31, 2004 and 2003, respectively, and unused lines of
credit under commercial loans totaling $4.5 million and $3.9 million,
respectively at those dates. Additionally, at December 31, 2004, the
Savings Bank was obligated under $297,000 of standby letters of credit. In
the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of December 31, 2004, and will be
funded from normal cash flow from operations and borrowings as necessary.
NOTE K- REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (the "OTS"). Failure to
meet minimum capital requirements can initiate certain mandatory -- and
possibly additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Savings Bank must meet specific capital
guidelines that involve quantitative measures of the Savings Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Savings Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
38
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE K - REGULATORY CAPITAL (continued)
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for minimum tangible capital (defined as
shareholders' equity less all intangible assets) equal to 1.5% of adjusted
total assets. The core capital requirement provides for minimum core
capital (tangible capital plus certain forms of supervisory goodwill and
other qualifying intangible assets) generally equal to 4.0% of adjusted
total assets, except for those associations with the highest examination
rating and acceptable levels of risk. The risk-based capital requirement
provides for the maintenance of core capital plus general loss allowances
equal to 8.0% of risk-weighted assets. In computing risk-weighted assets,
the Savings Bank multiplies the value of each asset on its statement of
financial condition by a defined risk-weighting factor, e.g., one- to
four-family residential loans carry a risk-weighted factor of 50%.
During 2004, the Savings Bank was notified by the OTS that it was
categorized as "well-capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well-capitalized" the
Savings Bank must maintain minimum capital ratios as set forth in the
following tables.
As of December 31, 2004 and 2003, management believes that the Savings
Bank met all capital adequacy requirements to which it was subject.
As of December 31, 2004
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $21,738 16.9% =/>$1,928 =/>1.5% =/>$6,425 =/> 5.0%
Core capital $21,738 16.9% =/>$5,140 =/>4.0% =/>$7,710 =/> 6.0%
Risk-based capital $23,252 28.7% =/>$6,480 =/>8.0% =/>$8,100 =/>10.0%
As of December 31, 2003
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $20,479 18.2% =/>$1,686 =/>1.5% =/>$5,620 =/> 5.0%
Core capital $20,479 18.2% =/>$4,496 =/>4.0% =/>$6,744 =/> 6.0%
Risk-based capital $21,784 31.2% =/>$5,579 =/>8.0% =/>$6,974 =/>10.0%
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Savings Bank, such as increased interest rates or a
downturn in the economy in the Savings Bank's market area, could adversely
affect future earnings and, consequently, the ability to meet future
minimum regulatory capital requirements.
39
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE L - CONDENSED FINANCIAL STATEMENTS OF PFS BANCORP, INC.
The following condensed financial statements summarize the financial
position of the Corporation as of December 31, 2004 and 2003, and the
results of its operations and its cash flows for the years ended December
31, 2004 and 2003.
PFS BANCORP, INC.
STATEMENTS OF FINANCIAL CONDITION
December 31, 2004 and 2003
(In thousands)
ASSETS 2004 2003
Interest-bearing deposits in Peoples Federal Savings Bank $ 424 $ 161
Interest-bearing deposits in other financial institutions -- 14
Investment securities -- 4,396
Loan receivable from ESOP 730 852
Investment in Peoples Federal Savings Bank 22,771 21,391
Prepaid expenses and other -- 28
Prepaid income taxes 22 19
Deferred income taxes 98 87
-------- --------
Total assets $ 24,045 $ 26,948
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 3,500 $ --
Accrued expenses and other liabilities 16 26
-------- --------
Total liabilities 3,516 26
Shareholders' equity
Common stock and additional paid-in capital 15,122 15,045
Retained earnings 7,298 14,101
Treasury stock (1,282) (1,282)
Shares acquired by stock benefit plans (1,608) (1,801)
Unrealized gains on securities designated as available for sale, net 999 859
-------- --------
Total shareholders' equity 20,529 26,922
-------- --------
Total liabilities and shareholders' equity $ 24,045 $ 26,948
======== ========
40
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE L - CONDENSED FINANCIAL STATEMENTS OF PFS BANCORP, INC. (continued)
PFS BANCORP, INC.
STATEMENTS OF EARNINGS
Years ended December 31, 2004 and 2003
(In thousands)
2004 2003
Revenue
Interest income $ 140 $ 192
Gain on sale of investment securities 6 --
Equity in earnings of Peoples Federal Savings Bank 949 851
------- -------
Total revenue 1,095 1,043
Interest expense 32 --
General and administrative expenses 199 232
------- -------
Total expense 231 232
Earnings before income tax credits 864 811
Income tax credits (33) (16)
------- -------
NET EARNINGS $ 897 $ 827
======= =======
41
PFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 2004 and 2003
NOTE L - CONDENSED FINANCIAL STATEMENTS OF PFS BANCORP, INC. (continued)
PFS BANCORP, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 2004 and 2003
(In thousands)
2004 2003
Cash provided by (used in) operating activities:
Net earnings for the year $ 897 $ 827
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Amortization of premiums and discounts on investment
securities - net 10 20
Gain on sale of investment securities (6) --
Equity in earnings of Peoples Federal Savings Bank (949) (851)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 28 --
Prepaid expenses and other assets -- 3
Prepaid income taxes 2 (51)
Deferred income taxes (4) (1)
Other liabilities (11) 1
-------- --------
Net cash used in operating activities (33) (52)
Cash flows provided by (used in) investing activities:
Purchase of investment securities (17,937) (17,952)
Proceeds from maturity of investment securities 21,584 18,350
Proceeds from sale of investment securities 713 --
Proceeds from repayments on loan to ESOP 122 121
-------- --------
Net cash provided by investing activities 4,482 519
Cash flows provided by (used in) financing activities:
Proceeds from note payable 3,500 --
Purchases of treasury stock -- (1,282)
Dividends paid on common stock (7,700) (449)
-------- --------
Net cash used in financing activities (4,200) (1,731)
-------- --------
Net increase (decrease) in cash and cash equivalents 249 (1,264)
Cash and cash equivalents at beginning of year 175 1,439
-------- --------
Cash and cash equivalents at end of year $ 424 $ 175
======== ========
Regulations of the Office of Thrift Supervision (OTS) impose limitations
on the payment of dividends and other capital distributions by savings
associations. Generally, the Savings Bank's payment of dividends is limited,
without prior OTS approval, to net earnings for the current calendar year plus
the two preceding calendar years, less capital distributions paid over the
comparable time period. Insured institutions are required to file an application
with the OTS for capital distributions in excess of this limitation. During 2004
and 2003, the Savings Bank did not distribute dividends to the Corporation. The
Savings Bank applied for and received approval to pay $6.5 million of dividends
to the Corporation in 2005.
42
PFS Bancorp, Inc.
DIRECTORS AND EXECUTIVE OFFICERS
================================================================================
PFS BANCORP, INC. AND PEOPLES FEDERAL SAVINGS BANK
Directors
---------
Robert L. Laker Dale R. Moeller
Chairman of the Board Director
Mel E. Green Carl E. Petty
Director, President and Chief Executive Officer Director
Gilbert L. Houze Jack D. Tandy
Director and Vice Chairman of the Board Director and Secretary
Executive Officers
------------------
Mel E. Green Stuart M. Suggs
President and Corporate Treasurer,
Chief Executive Officer Vice President,
Chief Operating Officer and
Chief Financial Officer
43
PFS Bancorp, Inc.
BANKING LOCATIONS AND SHAREHOLDER INFORMATION
================================================================================
BANKING LOCATIONS
PFS Bancorp, Inc. is an Indiana-incorporated thrift holding company
conducting business through its wholly-owned subsidiary, Peoples Federal Savings
Bank. Peoples Federal Savings Bank is a federally-chartered, SAIF-insured stock
savings bank operating through three offices in southeast Indiana.
Main Office
-----------
Second and Bridgeway Streets
Aurora, Indiana 47001
(812) 926-0631
Branch Offices
--------------
330 Industrial Access Road 705 E. Main Street
Rising Sun, Indiana 47040 Vevay, Indiana 47043
(812) 438-2111 (812) 427-2629
ANNUAL MEETING
The Annual Meeting of Shareholders of PFS Bancorp will be held on May 5,
2005, at 3:00 p.m., Eastern Daylight Savings Time, at PFS Bancorp's main office
located at Second and Bridgeway Streets, Aurora, Indiana.
TRANSFER AGENT/REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(908) 272-8511
SHAREHOLDER REQUESTS
Requests for annual reports, quarterly reports and related shareholder
literature should be directed to Stuart M. Suggs, Corporate Treasurer, Vice
President, Chief Operating Officer and Chief Financial Officer, PFS Bancorp,
Inc., Second and Bridgeway Streets, Aurora, Indiana 47001.
Shareholders needing assistance with stock records, transfers or lost
certificates, please contact PFS Bancorp's transfer agent, Registrar and
Transfer Company.
44